While US domestic air travel has increased just 5% over the last seven years, international travel to and from the US has surged over 30%—clear evidence of continued globalization. Rising international travel has driven a significant increase in US airline capacity, as illustrated in Figure 1.
Figure 1: International Air Traffic & Airline Capacity Utilization
Source: US Department of Transportation.
Airplanes are expensive, so keeping them in the air and full of paying passengers is a key determinant of airline profitability. As such, increased airline capacity utilization has supported growing operating margins for airline operators, as illustrated in Figure 2.
Figure 2: Airline Capacity Utilization and Airline Operating Margins
Source: US Department of Transportation, US Bureau of Labor Statistics.
As airline profitability grows, airlines have more cash to invest in new planes. Recently increasing airline profitability has driven commercial aerospace orders—shown in Figure 3.
Figure 3: Airline Operating Margins and Commercial Aircraft Orders
Source: US Bureau of Labor Statistics, US Census Bureau.
Typically, rising commercial aircraft orders have been a key driver for the aerospace and defense industry’s performance, as illustrated in Figure 4.
Figure 4: Commercial Aircraft Orders and The MSCI World Aerospace and Defense Index
Source: US Census Bureau, Thomson Reuters.
High airline capacity utilization and above-average profitability for airlines should continue as the global economy grows and economies become ever more integrated. Rising commercial aircraft orders, a powerful potential tailwind for companies in the aerospace and defense industry, are a likely result.